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Chinese property developer Evergrande is feared to become the next Lehman Brothers as the Chinese government seems to be reluctant to save the company that has accumulated over $300 billion in debt. The S&P Ratings expects Evergrande to default. The company has hundreds of unfinished residential buildings in its books and tries to pay its debtors with real estate holdings instead of cash. This mountain of debt has made the global equity markets nervous as they fear a domino effect. The fear is that if there is a spill-over from Chinese property markets into the global economy, credits might stop flowing. By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.

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USD index lost momentum yesterday as yields dropped on Evergrande triggered safe-haven oriented bond-buying. CHF and AUD have been the most bullish currencies since the London open yesterday while USD is the weakest. The benchmark US 10-year Treasuries yielded 1.31% at the end of the trading yesterday. Previous close: 1.37%.

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USD weakness and uncertainty around Chinese property developers helped gold to rally but oil, silver and platinum have been weak as investors are worried about new a Lehman slowing the economic growth.

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The S&P 500 (-1.70%), the DJIA (-1.78%) and the Nasdaq (-2.19%) sustained heavy losses yesterday as the Evergrande related fears kept the bids soft. All sectors sold off with the energy sector (-4.22%) and financials (-2.47%) suffering the biggest hits. All DJIA 30 stocks, except for one (MRK, +0.35%) finished the day in the red with CAT (-4.47%), GS (-3.41%) and JPM (-2.99%) sliding the most. AAL, EXPE, PFE, LLY and D were the best performers yesterday while BB, TPR, FCX, DVN and F lost the most. The above chart shows the % performance of each stock. All % performance charts in this report are courtesy of Tradingview.com.

Investors are clearly worried that the Evergrande mess could have serious consequences for cyclical sectors as well as for those that have (or might have) been financing Evergrande and other Chinese property firms. If the rot isn’t limited to this one company (which would be a surprise) and the Chinese government doesn’t step in, the banks financing these overleveraged property players will have some serious losses ahead. 

If Evergrande goes under and the other highly indebted Chinese property companies are denied financing we could see the house of cards collapsing and credit conditions being tightened globally for a longer period of time. This would hurt not only the banking sector but all the sectors that are dependent on investments. IF this happens we have a Chinese Lehman Brothers moment at hand. This certainly is something that the Fed and the rest of the central bankers around the world are not willing to tolerate.

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Apart from Canadian Federal Election, there are no main risk events in today’s calendar. For details on other important macroeconomic releases, see the TIOmarkets economic calendar here.

SP500Daily 21 09

Evergrande turning into the next Lehman Brothers sent the S&P 500 index lower yesterday. Our target range 4232 – 4262 wasn’t met yesterday as buying started above the 50% Fibonacci level at 4305. If there are signs that the problems in the Chinese property market aren’t limited to one company only then this rally is likely to be limited and we should see further downside volatility. Last week’s low at 4435 is the nearest resistance level while the 4232 – 4262 range is a likely support zone. This is where a projection based on the channel width points to.

HK50 Daily 21 09

Hang Seng index was trending lower already before the Evergrande. In yesterday’s move, the market lost a further 2.96% and is now trading below the 24588 resistance level. The next significant support level is at 22950, or approx. 5% below the current market price. This support is based on a historical level and the bear channel low coinciding 22950.

Macro Drivers for the USD 
As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.

The FEDFed Chair Powell said on Friday (August 27th) in Jackson Hole Symposium that tapering could begin in  2021 but also voiced concerns about the spread of delta variant.
StimulusThe US lawmakers have authorised approximately five trillion dollars of economic stimulus since the beginning of the pandemic. Now, US lawmakers have agreed to a  $1.2 trillion infrastructure spending plan. The Fed officials consider ending the asset purchases in the middle of 2022.
YieldsApart from the recent pickup (that started in August 2021), the Treasury yields have been moving lower since March 2021. All in all, the yields and interest rates are extremely low on both nominal and real basis.
EmploymentAfter two highly positive employment reports (+938K and +943K) the August number (+235K) was a big disappointment but in fact at a level that used to be the norm in the years before the pandemic. This number could delay the Fed taper but isn’t likely to reverse their decision to taper.
InflationThe month on month Core CPI (excluding food and energy) for August was confirmed at 0.1% (0.3% expected) while the headline inflation (y/y) came in line with expectations (5.3%, 5.3% expected, 5.4% prior). The core CPI increased 4.0% on a year-on-year basis after advancing 4.3% in July. Fed’s view that inflation is transitory seems correct.

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 The Next Main Risk Events

  • JPY – Monetary Policy Statement
  • JPY – BOJ Press Conference
  • USOIL – Crude Oil Inventories
  • USD – FOMC Economic Projections
  • USD – FOMC Statement
  • USD – Federal Funds Rate
  • USD – FOMC Press Conference

For more information and details see the TIOmarkets economic calendar here.

 Market News & Facts 

  • S&P ratings expects Evergrande to default
  • Trudeau to win the Canadian elections
  • RBA not looking to raise rates before 2024
  • UoM consumer sentiment 71.0 (72.2 expected)
  • New Zealand manufacturing PMI 40.1 (62 prior)
  • Democrats looking to repeal Trump’s tax cuts
  • China to release zinc, aluminium and copper from its reserves
  • New Zealand GDP 2.8% (1.4% expected)
  • Australian employment change -146.3k (-90k expected)
  • UK August CPI 3.2% (2.9% y/y expected)
  • China August retail sales 2.5% y/y (7% expected, 8.5% prior) 
  • US August CPI y/y +5.3% (5.3% expected)
  • RBA’s Lowe: bond purchases likely to end in 2022
  • OPEC: global oil demand to exceed pre-pandemic levels in 2022
  • Natural Gas at multi-year highs
  • US senator Manchin not voting for the $3.5 trillion package
  • SNB: Negative rates are still needed to keep the CHF low
  • China released some of its strategic oil reserves

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Trade Safe!

Janne Muta
Chief Market Analyst

Open a VIP Black account now at www.TIOmarkets.com. We want you to be able to exploit trading opportunities in financial markets with 0 commission and tight spreads. Take advantage of the best trading account in the industry: Tiomarkets VIP Black. For more details on this truly exceptional offering see here. For more analysis and commentary, visit our YouTube channel where you can find market commentary videos to support your learning and growth as a trader. 

DISCLAIMER TIOmarkets offers exclusively consultancy-free service. The views expressed in this blog are our opinions only and made available purely for educational and marketing purposes and do NOT constitute advice or investment recommendation (and should not be considered as such) and do not in any way constitute an invitation to acquire any financial instrument or product. TIOmarkets and its affiliates and consultants are not liable for any damages that may be caused by individual comments or statements by TIOmarkets analysis and assumes no liability with respect to the completeness and correctness of the content presented. The investor is solely responsible for the risk of his/her investment decisions. The analyzes and comments presented do not include any consideration of your personal investment objectives, financial circumstances or needs. The content has not been prepared in accordance with any legal requirements for financial analyzes and must, therefore, be viewed by the reader as marketing information. TIOmarkets prohibits duplication or publication without explicit approval. FX and CFDs are leveraged products. They are not suitable for every investor, as they carry a high risk of losing your capital. Please ensure you fully understand the risks involved. All the prices in this report are CFD prices based on price charts provided by TIOmarkets unless otherwise stated. 

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